Prudent Policy Research Articles

FramingThe Wealth of Nations

AbstractWhen The Wealth of Nations was published in 1776, this was recognized as another work by the author of The Theory of Moral Sentiments, a work that Smith extended and revised through six editions until the year he died, in 1790. Smith had in 1776 refrained from elaborating arguments that he had already made in 1759, and this was likely well understood by his contemporaries. But by the later 1790s The Theory of Moral Sentiments was no longer so widely read and was becoming regarded as dated in its approach. Smith had located the nature and causes of the wealth of nations in human attributes and prudent policy; detached from the context provided by The Theory of Moral Sentiments, The Wealth of Nations was now treated as a repository of economic principles that required criticism and correction. It was quickly converted into the founding text of a new political economy, exemplified by the French translation by Garnier (1802), Jean-Baptiste Say's Traité (1803), and of course David Ricardo's Principles (1817). Political economists of the early nineteenth century disregarded most of those features of The Wealth of Nations that have since the later 1970s been reemphasized by new scholarship; that the Glasgow edition began publication for the 1976 bicentenary of The Wealth of Nations was at the time thought only fitting for a writer then treated as the property of economists. But by comparing Ricardo's Principles with Smith's Wealth of Nations we can better understand that this foreshortened appreciation of Adam Smith's work has a longer history than usually thought.

The Dynamic Effects of Urban–Rural Income Inequality on Sustainable Economic Growth under Urbanization and Monetary Policy in China

Income inequality in China has become increasingly serious since the beginning of the economic reform period in the 1970s, with urban–rural income inequality playing a large role. Urbanization policy and monetary policy are currently important economic policy tools for the Chinese government. In order to investigate the influence of inequality on the economy and to provide recommendations for ensuring the sustainability of growth, we study the effect of urban–rural income inequality on economic growth in the context of urbanization and monetary policy in China between 2002 and 2021. Using a flexible time-varying parametric structural vector auto-regression (TVP-VAR) model and a robust Markov chain Monte Carlo (MCMC) algorithm, our empirical results show that the effect is time-varying, with inequality promoting growth in the early years but affecting it adversely at later stages. Currently, urbanization mitigates inequality and promotes growth simultaneously, while easy monetary policy worsens inequality and affects growth adversely in the long term. We suggest that the authorities need to consider the implementation of policy rebalancing to ensure that the sustainability of economic development is not jeopardized because of worsening income disparity. Proactive urbanization policy and prudent monetary policy are viable rebalancing options.

Nonlinear Dynamics of the Development-Inequality Nexus in Emerging Countries: The Case of a Prudential Policy Regime

This study analyses the nonlinear dynamic impact of economic development on income inequality in a prudential policy regime in a panel of 15 emerging markets from 1985–2019. More importantly, we seek to extend the existing debate on this subject, with roots back to the seminal work by Kuznets and many others, and add a twist by introducing a distinction between a prudential regime (1985–1999) and a non-prudential regime (2000–2019), as well as the threshold level at which economic development reduces inequality, using Panel Smooth Transition Regression (PSTR). The Generalized Method of Moments and fixed-effect models will be used to support our baseline results. The PSTR model was adopted due to its ability to deal with features that cannot be accounted for in dynamic panel techniques, such as endogeneity, homogeneity, cross-country variability, and time instability within the model. We found evidence of a non-linear effect between the two variables, where the threshold was found to be US$13,800, above which economic development reduces inequality in selected countries, and this further confirms the Kuznets inverted U-shape in both regimes. Macroprudential policies were found to trigger development-inequality relationships. Our evidence largely suggests that policymakers ought to formulate policies that aim to attract investment, which will then create job opportunities and foster an improvement in the stan-dard of living, and also should be abreast of the level of economic development before implementing macroprudential policies.

Bitcoin vs. Gold: Who is the Better Choice for Trading?

Venture capital led by Bitcoin and gold has become increasingly popular in the past several years, so the research of cryptocurrencies (such as Bitcoin) becomes deeper and deeper. Many researchers have studied the collaborative investment of bitcoin and gold, which is an expective portfolio. In this paper, the authors constructed a systematic model, achieving the combination among prediction, making strategies, solving profits, and evaluation. All the study in this paper is based on the given data and constructed model with accurate references.In this paper, the authors selected the long short-term memory model (LSTM) as the basis, then designed two models called the gold price prediction model (GPPM) and the Bitcoin price prediction model (BPPM) to estimate the price of both gold and Bitcoin, standing as a trader, not a “god economist”. The error analysis shows a good performance of GPPM and BPPM, and it gives the authors confidence to make strategies and calculate final profits (investment worth).Unambiguously, the final goal of this question is to maximize the total assets (profits), so the author set up a single objective optimization model (SOOM) called the trading strategy model (TSM). The total constraint conditions are divided into six directions, including the basic trading conditions, the evaluation of financial risk, and the difference between gold and Bitcoin. Additionally, the costumers with different trading risk tolerance will acquire different assets finally, which indicates that the prudent policy generally can lead to a better result. After calculation, the asset on 2021/9/10 is about 1.59×108 USD, a considerable number.The evaluation of TSM has two parts, one is the disturbance test. This test randomly sets that several days’ trading does not occur, then has a comparison between the original model prices and the prices after disturbance. The result proves that the strategy predicted by TSM is the best strategy. The result of the sensitivity test in section 4 finds the polynomial relationship between the assets and the transaction costs. Under current conditions, the final assets will decrease by 4.2% if the transaction costs of gold increase by 1%, and will increase by 2.1% if the transaction costs of bitcoin increase by 1%.Finally, the authors wrote a memorandum for different customers & traders. We sincerely hope the memorandum can help them in the near future.

Institutional Arrangements and Inflation Bias: A Dynamic Heterogeneous Panel Approach

AbstractThe paper investigates whether the institutional arrangements that determine the conduct of monetary and prudential policies influence policymakers' actions in pursuing their designated mandates. Employing recently developed dynamic heterogeneous panel methods and using data for 25 industrialized countries from 1960 to 2018, we empirically assess whether central banks' main objective of inflation stability is compromised when assigned with both policy mandates manifested as inflation bias. Our results show that, once we appropriately control for relevant policy and institutional factors, the separation of macroprudential regulation and monetary policy does not have a significant effect on inflation outcomes.

The Impact of Achieving the Objectives of the Overall Safety Policy on Economic Development in Palestine

The primary objective of macro prudential policy is to contain systemic risks or large-scale financial instability . Therefore, the systemic risk can definition will be as “the risk that financial instability will spread on a large scale and lead to impeding the functioning of the financial system to an extent that affects growth and welfare.”

The COVID-19 Pandemic and Public Finance of Georgia

The COVID-19 pandemic has severely affected the global economy and similarly to other countries, COVID-19 has hit Georgia hard. COVID-19 pandemic has had a significant negative impact on both the private sector and health and lives of the people, in the beginning of 2020 it became necessary to find additional financial resources for both business and direct assistance to the population, as well as to cover the costs of preventing the epidemic and provided citizens with social support. In order to finance the Emergency Response Plan measures developed by the Government of Georgia in response to the negative consequences of the COVID-19 pandemic, it was necessary to attract approximately GEL 3.6 billion international financial institutions. Georgia has been able to respond to the socio-economic challenges posed by the OVID-19 pandemic thanks to its recent years prudent macroeconomic policies, fiscal and external reserves growth, well-capitalized financial system and significant donor financial assistance. Keywords: COVID-19 pandemic, Public Finance, Budget support credits, donor support.

Nonlinear Dynamics of the Financial–Growth Nexus in African Emerging Economies: The Case of a Macroprudential Policy Regime

A panel data analysis of nonlinear financial growth dynamics in a macroprudential policy regime was conducted in a panel of 10 African emerging countries from 1983–2020, where it had been a non-prudential regime from 1983–1999 and a prudential regime from 2000–2020. The paper explored the validity of invented U-shape hypothesis in the prudential policy regime as well as the threshold level at which excessive finance boosts growth using the panel smooth transition regression (PSTR) model. The PSTR model was adopted due to its ability to address the problems of endogeneity and heterogeneity in a nonlinear framework. The results reveal evidence of a nonlinear effect between financial development and economic growth, where the minimum level of financial development is found to be 60.5% of GDP, above which financial development increases growth in African emerging countries. The findings confirmed a U-shaped relationship, contradicting the invented U-curve hypothesis. The focal policy recommendation is that the financial sector should be given adequate consideration and recognition by, for example, implementing appropriate financial reforms, developing a suitable investment portfolio, and keeping spending on technological investment in Africa’s emerging countries below the threshold. Again, caution is needed when introducing macroprudential policies at a low level of the financial system.

Finance, growth and (macro)prudential policy: European evidence

This paper examines the interactions between financial development, economic growth and (macro)prudential policy on a sample of 12 euro area countries. Our main takeaway is that active (macro)prudential policy supports the positive finance-growth nexus instead of disrupting it. These benefits are found to be more likely to materialize during tightening of (macro)prudential policy measures and not during easing. This result is conditional on the ability of (macro)prudential policy to curb excess credit growth and mitigate systemic risk, which would otherwise disrupt the market. Moreover, we assert that when analysing the effects of (macro)prudential policy, it is important to account for the direction of (macro)prudential measures, not just for the frequency at which they are implemented.

Sovereign Debt Sustainability and Central Bank Credibility

This article surveys the literature on sovereign debt sustainability from its origins in the mid-1980s to the present and focuses on four debates. First, we evaluate the shift from an accounting-based view of debt sustainability using government borrowing rates to a model-based view that uses stochastic discount rates. Second, we review empirical tests, focusing on the relationship between primary balances and debt. Third, we discuss debt sustainability in the presence of rollover risk. And fourth, we evaluate whether government borrowing costs below rates of growth ( r < g) generate a free lunch, in the sense that debt sustainability does not require future primary surpluses. We argue that liquidity services provided by sovereign debt may indeed lead to a free lunch, albeit one of limited size. The value of such services depends on the credibility of the central bank, which can be accumulated via prudent policies and subsequently drawn on to allow for looser fiscal policy.

The impact of national culture on systemic risk

We investigate the effects of national culture on systemic risk using a comprehensive dataset from global banks in 58 countries over the period 2003–2016. Our results reveal that systemic risk measures are associated with cultural values. In particular, our results show that individualism and masculinity are the main drivers of banks' contribution to systemic risk. In addition, the impact of cultural variables on the systemic risk measures is nonlinear. This variation may be driven by both information in the national cultural measures and the skewness of the systemic risk measures. The findings have implications for prudential policies: designing uniform prudential and regulatory policies in banking to avoid financial distress for countries with heterogeneous cultures might not have the desire impact; rather, they might be more effective if the type of culture in each individual country is considered.

Policy implications and welfare analysis under the possibility of default for the Euro zone area

This study investigates the role of monetary and macro prudential policies in a DSGE model for the Euro zone area by incorporating financial frictions, a monopolistic banking sector and shocks on technology, productivity costs, housing demand and possibility of default, under a stable and a fragile economic environment. The model is solved, using a second order approximation methodology, to evaluate policy effectiveness and welfare analysis targeting to match European key macroeconomic variables for the period 2000–2018. The inclusion of the possibility of a default under this calibration framework, which is used to mimic a financial vulnerable environment, showed that the dynamics of the model change accordingly to the existing economic environment. The simple monetary rule is more effective in stabilizing the economy under a stable environment, whereas the macro prudential rule is more effective for financial stability under a fragile environment. Moreover, the macro prudential policy is the most important tool for optimizing welfare and reducing volatility for inflation and output.

Modeling censored tourism expenditures in Turkey with non-normal and heteroscedastic errors: An application of the inverse hyperbolic sine double-hurdle model

Censoring, extreme values, and non-normal distribution are common features in microdata. These data features can compromise the statistical distributions of the estimators when an appropriate model is not used. We use an inverse hyperbolic sine (IHS) transformation in the double-hurdle (DH) model to accommodate extreme values and skewness in censored accommodation spending among Turkish households. The full-parameterized model nests many restricted specifications which do not accommodate dependence, heteroscedasticity, and non-normality in the error terms. Statistical test results support the use of the fully parameterized dependent IHS-DH specification. The statistically significant correlation between the binary and level decisions of accommodation precludes the use of a model with a two-step structure. Some of the findings in our study have a determining or driving force in expressing causality relationship in monthly accommodation probability and level decisions. The study made also prudent policy recommendations about what the results might mean to policymakers and stakeholders.

Asymmetric Effects of Fiscal Deficit Financing and Inflation Dynamics in Ghana

Fiscal Deficit Financing (FDF) has been unsustainably high in Ghana and this has led to unstable and high inflation episodes since 1980. The FDF averaged 4.6% from 2005-2011 and 6.9% to 2012-2018, while inflation averaged 11.0% and 13.1% relative to medium-term to long-term inflation target of 8.0% in the same periods, respectively. Previous studies on deficit financing-inflation nexus in Ghana have primarily focused on linear and symmetric relationship, thereby ignoring the asymmetric policy effects of FDF on inflation dynamics. Disregarding the asymmetry of FDF could impact negatively on efforts of Bank of Ghana in forecasting and controlling inflation effectively. To address this problem, this study was therefore designed to investigate the asymmetric policy effects of FDF on inflation dynamics in Ghana over the period 1980-2018. The fiscal theory of the price level provided the theoretical framework. The Non-linear Autoregressive Distributed Lag (NARDL) econometric methodology was deployed to examine the asymmetric effects of FDF on inflation dynamics. The paper found that FDF had asymmetric effects on inflation dynamics in Ghana as the positive outcome of FDF had a significant positive asymmetric effect of 29.0% on inflation while its negative outcome had a relatively less asymmetric effect of 22% on inflation dynamics, suggesting that consolidating fiscal policy was disinflationary. The paper finally recommends that fiscal authorities should adopt consolidating and prudent fiscal policies that could lead to fiscal solvency and sustainability, which could potentially moderate the effect of FDF on inflation dynamics.

Analysis of Energy Substitution vis-a-vis Security Policy Trade-off with the Emissions Embodied in Bilateral Trade: An Index Decomposition Approach

The trade-off between climate protection and energy security is more striking for the developing countries those are having fewer resources to combat the risk of sudden supply disruptions of energy, however, its reflection in the literature is not found sufficient. This paper aims at exploring this trade-off by uniquely representing the India-UK bilateral trade and applies a spatial index-decomposition exercise of the emissions embodied in the net export. The calculated emission imbalance implied in India-UK bilateral trade is decomposed into the contributions from five important drivers. The study compares the policy trade-offs under three hypothetical scenarios where India is adopting prudent policy measures imitating the UK. Based on these scenario experiments, the study suggests a decision trick where India is adopting a lower energy intensity of input use by altering its energy consumption level keeping the employment of inputs unchanged.

BELT AND ROAD INITIATIVE

Chinese Belt and Road Initiative (BRI) is primarily aimed at strategic interconnectedness of Asia, Europe and Africa and regional economic connectivity in South Asia, East, West and Central Asia by maintaining connection among partner countries in highly interconnected globalised World. Pakistan’s integration into BRI through CPEC can play a vital role in terms of regional economic and political development encompassing variety of opportunities for Pakistan. This Chinese initiative will diffuse geopolitical rivalries, giving leverage to geo-economics over geo-politics in South Asian region. BRI also poses multiple and critical geo-strategic challenges for the region especially for Pakistan. The objectives of the study are to explore the possible outcomes of Belt and Road Initiative, Prospects of regional economic developments, Challenges and Opportunities for the region especially for Pakistan. The study brings out the emerging trends concerning primacy of the geo-economics over geopolitics albeit in the nascent stage amid CPEC. The challenges likely to be faced by Pakistan by these developments would equally present numerous opportunities. These, if capitalised through prudent policies and execution would enhance strategic relevance of Pakistan among comity of nations. The paper attempts to proffer relevant policy level recommendations for the implementation.

The effect of the Seattle Police‐Free CHOP zone on crime: A microsynthetic control evaluation

Research SummaryNightly confrontations occurred between protestors and officers outside of the Seattle Police Department's (SPD's) East precinct in the aftermath of George Floyd's murder. On June 8, 2020, the SPD abandoned the East precinct in an attempt to calm the situation. Following closure of the precinct, the Capitol Hill Occupation Protest (CHOP) took hold in the surrounding 6‐block area. The CHOP occupation lasted until July 1, 2020. Over this time period, CHOP operated as an autonomous zone, with police officers not patrolling and generally not responding to calls for police service within the area. We used the microsynthetic control group method to analyze the effect of CHOP on crime during the 24‐day occupation. Results indicate crime significantly increased in the CHOP zone, the encompassing two‐block area, and the overall East precinct service area.Policy ImplicationsThe current study found comparatively stronger effects than the general literature on depolicing. The significant crime increase is particularly noteworthy given the short time frame of the CHOP occupation and retreat of police from the area theoretically making it more challenging for crimes to be reported by citizens and/or proactively discovered by officers. This suggests that police abolition, the most extreme form of the police defunding movement, may significantly compromise public safety. Moving forward, a prudent policy solution may be to simultaneously support the evidence‐based crime prevention work of police and community‐based institutions. Such an approach may achieve currently desired policing reforms without risking crime spikes that can result from drastic reductions of police presence. Wide‐scale adoption of evidence‐based policing may provide a vehicle for such meaningful, long‐term reform.

Determinants of Financial Instability in Selected <i>East and Southern African</i> Countries

These studies intend to identify the major determinants of financial instability in the East and Southern African Countries from 2010 to 2019. The issue of financial instability has, for long, been the major concern of policy makers, but still, there have been on-going debates and extensive discussions on measuring the financial instability. Several studies show that limits on LTV and DTI ratios can curb the feedback loop between mortgage credit availability and house price appreciation. Nevertheless, there is to date only every limited analysis of any macroeconomic effects and the use of macroprudential tools and no macro prudential instruments in East and Southern African Countries in general. Study used Credit growth and PCA analysis of financial stability index and system GMM model to identify financial instability in contemporary inclusive financial economy. FII constructed based on PCA of different variables like bank Z-Score and net interest margin in the first scenarios and using composite index of Credit growth, banking Score and net interest margin in the second scenarios. Result of the study reveals FII affected by Money supply, debt growth, inflation rate and economic growth etc. In spite of the credible theoretical arguments, using the system GMM method study found that FII negatively affected by Money supplies, debt growth, inflation rate, volatility of economic growth in 14 East and Southern African Countries included in the study between 2010 and 2019. Therefore, building integrated, coordinated and potentially consistent macro prudential policies was required to avoid negative spillovers that could counteract the financial instability. Furthermore, to constrain funding or liquidity risks, liquidity-related instruments like limits on net open currency positions, currency mismatches and reserve requirements are an asset.

Влияние пандемии COVID-19 на экономику Таиланда

The author analyzes the situation in the Thai economy in 2020–2021 after the beginning of the COVID-19 pandemic basing on the experience of working in this country as a Russian diplomat. Thailand was hit harder by the pandemic than the neighboring countries due to a larger share of tourism sector in the GDP, problems with the supply and local production of vaccines at an initial stage as well as the sharp decline in foreign trade. After a rocky start the Thai authorities managed to launch mass vaccination campaign and continue measures to support business and vulnerable groups of population. A reviving demand in developed countries helped to increase exports. However, the Thai economy’s recovery is going to be long and uneven. Firstly, global tourism sector is unlikely to return back to previous level soon and would depend on the COVID-19 situation. The possibility of further stepping up international trade will be limited because of global supply chain disruptions. Moreover, it will be difficult to support the GDP growth through the private and public consumption – the household and government debt during last 2 years have considerably increased. This could have negative impact on economic growth in 2022 and in the long-term. Hence, this year the Thai authorities would have to conduct prudent policy while trying to support households’ income and confine growing unemployment, because fiscal space for new borrowing is running out. Another priority is keeping epidemic situation in the Kingdom in order by continuing vaccination of its population.

The Nexus among Competition, Risk and Performance in Banking Sector of Saudi Arabia

The determination behind this research paper is to inspect the relation among competition, risk, and financial performance in the Saudi Arabian banking sector for 2011-2019. This paper used Two steps Generalized Method of Moment (GMM) as an estimation technique. This study focused on Lerner Index and Herfindahl-Hirschman Index to gauge bank competition and used three alternative measures for risk, namely credit risk, liquidity risk, and z-score. The coefficients of the Lerner Index and Herfindahl-Hirschman Index are significant and positive with profitability which signifies that higher competition in Saudi Arabian banks led to a decrease in profitability which is explained in the Structural Conduct Performance Hypothesis. Z-score shows a significant positive relationship with profitability. Credit risk has a positive relationship with profitability reveals that risk-adjusted returns are being targeted by risk-averse shareholders trying to gain more profits to compensate for the higher credit risk. The outcome of the study provides a comprehensive framework to the Central bank and other regulatory authorities to introduce micro and macro prudential policies that are aligned to the stability of the financial system.